Has everyone gets tripped by this one?
Management wants to eliminate the plan’s current funding shortfall without making additional contribution plan.
Why liability driven approach doesn’t work but AO works.
I thought we need to minimize the shortfall to close the gap first before resorting to grow asset by using AO.
Do I miss anything here?
Anyone try this one ?
They are underfunded, so if you use liability driven approach, you are just matching the liabilities… how would you ever gain equity to reach a full funded status?
So if the pension is underfunded, we should prefer AO> ALM.
Overfunded will be applied the other way around. Is that right?
AO could help reduce the shortfall but an unfunded DB plan should not take more risk.
Yeah the key word in this question is could AO or liability mimicking make up the shortfall.
Obviously mimicking could not as you would just keep pace with the liabilities and have no chance to catching up.
AO could make up the shortfall by taking more risk - but as noted above you generally would avoid more risk if your underfunded.
Liability Based pension solutions focus on immunizing cash flows or making the characteristics of the assets like the liability duration/cash flow
If you do that you will never reach the return you need to offset your liabilities
The Asset Only approach does not consider liabilities and will try to maximize the return